Credit Suisse is said to be considering dividing up its investment bank into three parts and creating a «bad bank». By doing so it hopes to avoid a capital increase.

In a continuing effort to put itself on a better course, Credit Suisse is said to be considering splitting its investment bank into three parts, forming a «bad bank» for risky assets, according to a report in the «Financial Times» (behind paywall) citing people familiar with the matter.

The news comes as the bank has been undergoing a strategic review led by new CEO Ulrich Koerner, who took over from Thomas Gottstein following its second-quarter results.  The results of the review will be released in conjunction with the bank's third-quarter results on October 27. 

Credit Suisse declined to discuss the «FT» story, issuing a statement that «We have said we will update on progress on our comprehensive strategy review when we announce our third quarter earnings; it would be premature to comment on any potential outcomes before then.»

Three Step Dance

Under the proposals now under consideration, the investment bank would be split into three parts. The group's advisory business, which could be spun off at a later date, a «bad bank» for risky assets to be wound down, and the rest of the business.

Behind all the turmoil is Credit Suisse's Swiss investment bank continues to be a leader in the country and has the deepest «wallet».

Speculations Running Rampant

Nature abhors a vacuum as the saying goes and in the absence of news from Credit Suisse, speculation over the fate of jobs and the investment bank has been running at a high level. Another harbinger of a spin-off was that it was considering giving investment bankers an equity stake in the division. There was also speculation that the board of directors was considering the rejuvenation of the First Boston brand for the investment bank.

While both ideas seem to have been floated as trial balloons, they are not considered to be top priorities, according to the «FT».

Robbing Peter to Pay Paul?

While a sale of the New York-based securitized products division would reduce the bank's capital commitment, it would also rob it of one of its most profitable businesses. The division bundles debt such as mortgages and loans, reselling them as securities.

The cost of winding down the investment bank would blast a 4 billion Swiss franc ($4.14 billion) hole in the group's capital position, according to a Deutsche Bank analysis.

The «Financial Times» further reported that the bank's top management is keen to avoid raising funds from the market given the depressed share price. Moreover, Credit Suisse was hit by a series of downgrades by rating agencies, increasing the bank's borrowing costs.

Credit Suisse is also planning job cuts that could hit about 10 percent of its workforce, according to various media reports.